Assignment Question 1:
- a) Integrity and objectivity are the basic elements of auditor’s independence. An auditor is required to perform his audit functions free from any kind of personal interest. In the given situation, if CJ participates in the seminar, it will affect auditor’s independence. Promoting LTH’s business will lead to soliciting the client’s work which falls outside the domain of an auditor. This will make CJ, a biased auditor and will affect the independence during the course of LTH’s audit (Parker, 2015).
An auditor is required to receive due compensation for conducting audit. Acceptance of gifts in cash or kind has the power to influence an auditor’s judgment which is in violation to the Code of Ethics. If Geoff accepts the offer of LTH, it will affect auditor’s independence in terms of accepting extra offers from his clients in lieu of favouring LTH rather than upholding audit principles. Such offer can turn out to be a potential risk hampering auditor’s independence.
Since Michael’s dad is LTH’s financial controller, it is possible that he might get influenced while conducting audit in the capacity of an audit staff. The financial controller might try to control the auditing process through his son’s activities. This can curtail auditor’s independence of CJI in an overall manner through Michael’s course of action in the capacity of an audit staff. (Parker, 2015).
Annette’s preconceived notions towards work will affect auditor’s independence. Annette is supposed to represent CJI as an audit staff and her previous job activities should not determine the current activities. Since she is supposed to check her own work done, it might highlight her biased nature towards conducting audit. She might presume that the work is free from error as the maker of accounts is the checker (ASIC, 2014).
- b) For the above mentioned threats, there are certain safeguards with the help of which auditor’s independence can be duly maintained. CJI can safeguard them by discussing clearly their range of working profile with LTH. This will help LTH in understanding CJI’s professional competence. It can be communicated that such kind of CJI’s actions will be against their code of ethics. By upholding their professional domain, such risk can be mitigated. CJI should maintain their integrity and objectivity as an audit firm.
In order to uphold auditor’s independence, it is advisable that Geoff needs to exercise his due diligence as an auditor and to analyse the purpose behind LTH’s offering him extra offers. It is important to recognize his professional competencies in auditor’s capacity and that acceptance of such offers can build up unrealistic expectations of LTH in terms of audit (ASIC, 2014).
Michael should realize the importance and integrity of his profession. Being an audit staff, value of related parties should be carefully scrutinized and it should not affect the course of an audit. He should do justice to his outlined work rather than getting influenced directly, or indirectly from the financial controller. Michael’s personal relation should not interfere with his scope of work.
Annette’s independence in the scope of audit will be safeguarded if she can understand professional responsibilities of an audit staff and ways to justify it. It should be analysed that previous job engagements should not define the scope of current job. In the capacity of an auditor she is required to carry out her responsibilities in an unbiased manner. Thus, in these ways such threats can be safeguarded (Australian Government, Financial Reporting Council, 2017). Thus, by the adoption of such objectives and methods, the above stated risks can be mitigated for all kinds of situations.
Assignment Question 2:
- a) As far as the purchasing of equipment and spare parts is concerned, two business risks to MSL that Crampton and Hasaad will consider in planning the 2015 audit are financial risk and strategic risk. It is important for an auditor to determine its client’s financial strength. For this, evaluation of financial risk is necessary. It refers to outflow and inflow of currency in the business with a chance of certain financial loss. Since, MSL is flourishing its business on an international level, it is important to analyse the hedging options of the company in relation to the exchange rates (Team, 2016). Additionally, its impacts on the suppliers are also required to be evaluated. For example, MSL may require investing more of Australian Dollars in exchange of U.S. dollar, pound or yen while purchasing its essentials. The reason is the fluctuating nature of foreign exchanges. So, Crampton and Hasaad will consider MSL’s hedging strategies as in how they are playing their role in making the overall business more effective and efficient(Blackman, 2017).
Secondly, strategic risk will help in analysing whether the companies’ strategies in relation to purchasing of equipment and spare parts are effective enough in order to fulfil company’s goals or not. For this, the plan will incorporate analysing the receptive nature of MSL towards technological changes in the mining industry. For example, whether they are purchasing the requisites as per the framework of latest technology or not (Byrne, 2014)?
It is also necessary to evaluate whether MSL is purchasing those equipments and spare parts that suit their customer demands. The audit plan should focus upon MSL’s buying strategy from its manufacturing suppliers, as in how effectively they are able to determine their choice of suppliers and whether it is turning out to be profitable for the company or not. Thus, MSL’s business risks i.e. strategic risk and financial risk, will lay down one of the essential elements in planning the course of audit for Crampton and Hasaad (Blackman, 2017). Still, there are other risk like operating risk but of all, financial risk and strategic risk are quite crucial to analyse for making the audit process effective and for the betterment of MSL.
- b) The scope of auditing also involves certain audit risk which is having the capacity to distort the auditing process or concluding inaccurate conclusions. For all kinds of risk mentioned for MSL, Crampton and Hasaad will have their own risk in auditing which can hinder the scope of their entire auditing process. As far as the financial risk is concerned, there is a scope for detection risk. This risk signifies failure of an auditor in detecting important misstatements in the financial statements. For example, MSL is a big company with large number of supplier’s lists for the purchase of equipments and spare parts. The auditor will choose sampling procedure for the checking of their transactions. Fraud and error can take place in those samples which has not been chosen for the scrutiny. This will affect foreign exchange account balance and suppliers balance in the financial statement. Such risk can be mitigated if the number of samples is increased for testing (Accounting Simplified, 2013).
In the case of strategic risk, inherent risk of an auditor may lead to non detection of errors in the financial statements of MSL. Crampton and Hasaad may face issues in determining their judgment level and the actual estimation of the business. For example, the auditors may differ from the strategic decisions taken in terms of the adopted technology. Or, they don’t posses that level of expertise to analyse to the grass root level (Byrne, 2014).
This will lead to error in the financial statements in relation to the factors adopted by MSL and their internal controls. Account balance of research and development, marketing expenses like conducting surveys for knowing the latest trend in the mining industry may turn out to be quite inflated or deflated if compared with the industry level (Accounting Simplified, 2013).
Thus, these were the audit risk and their effect upon certain account balances of MSL which has the potential to disrupt the course of development and growth of MSL along with the effectiveness of Crampton and Hasaad in their professional competence. In spite of such audit risk, it can be controlled or mitigated to some extent if the auditors adopt certain changes in their auditing practises which will make their actions more effective.
Accounting Simplified, 2013. Audit Risk Model. [Online] Available at: https://accounting-simplified.com/audit/risk-assessment/audit-risk.html [Accessed 10 April 2017].
ASIC, 2014. Auditor independence and audit quality. [Online] Available at: https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/auditor-independence-and-audit-quality/[Accessed 10 april 2017].
Australian Government, Financial Reporting Council, 2017. Monitoring auditor independence. [Online] Available at: https://www.frc.gov.au/about_the_frc/annual-reports/annual-report-2010-11/ar_10-11_part_3/[Accessed 10 April 2017].
Blackman, A., 2017. The Main Types of Business Risk. [Online] Available at: https://business.tutsplus.com/tutorials/the-main-types-of-business-risk--cms-22693 [Accessed 10 April 2017].
Byrne, A., 2014. Governance, Strategic Risk, Internal Audit. EDPACS, XLIX(2), pp. 6-14.
Parker, A., 2015. 6 key threats to auditor independence. [Online] Available at: https://www.intheblack.com/articles/2015/01/06/6-key-threats-to-auditor-independence[Accessed 10 April 2017].
Team, I., 2016. How Exchange Rate Fluctuations Affect International Businesses (and Ways to Protect Yourself). [Online] Available at: https://isratransfer.com/blog/how-exchange-rate-fluctuations-affect-international-businesses-and-ways-to-protect-yourself/
[Accessed 10 April 2017].